Working Paper 0016
Is the Political Business Cycle for Real?
by S. Brock Blomberg and Gregory D. Hess
This paper constructs and examines a macroeconomic model which combines features from both real and political business cycle models. We augment a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities: First, that on average the economy expands early under Democratic presidents and contracts early under Republican presidents. Second, that presidents whose parties successfully retain the presidency have stronger than average growth in the second half of their terms. The model generates both of these features that conform to U.S. post–World War II data.
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Working Paper 0015 top
On the Welfare Gains of Reducing the Likelihood of Economic Crises
by Satyajit Chatterjee and Dean Corbae
Our aim in this paper is to obtain a measure of the potential benefit of reducing the likelihood of economic crises. We define an economic crisis as a Depression-style collapse of economic activity. Based on the observed frequency of Depression-like events, we estimate this likelihood to be approximately once every 83 years for the U.S. Even for this small probability of transiting into a Depression-like state, the welfare gain from setting it to zero can range between 1.05 percent and 6.59 percent of annual consumption, in perpetuity. These large gains arise because even though the probability of encountering a Depression-like state is small, it is highly persistent once it occurs. We also find that for some calibrations of the model, uninsured unemployment risk contributes significantly to the size of these gains.
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We present a series of stylized facts about gross loan flows and how they vary over time, bank size, and region. We define loan creation as the sum of the change in bank loans at all banks that increased loans since last quarter. Loan destruction is similarly defined as the absolute value of the change in loans at all banks that decreased loans. The gross flow (akin to what the labor literature calls reallocation) is the sum of creation and destruction.
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Despite the numerous
benefits of loan commitments, only 79% of the commercial
and industrial loans are made under commitment. I show
that two factors limit the use of loan commitments.
First, because banks commit themselves to lend, they
carry costly liquidity reserves to meet their obligations.
Due to liquidity costs, the interest rate on commitment
loans is high relative to spot loans. Second, high interest
rates trigger moral hazard. If the bank expects a profitable
relationship in the future, it can absorb a portion
of the liquidity costs to reduce the interest rate and
attenuate moral hazard. If not, the borrower cannot
get a loan commitment.
PDF file 429K
Working Paper 0012 top
Implementing the Friedman Rule
by Peter N. Ireland
In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions only on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run.
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This paper integrates money into a real model of agency costs. Money is introduced by imposing a cash-in-advance constraint on a subset of transactions. The underlying real model is a standard real business cycle model modified to include endogenous agency costs. The chief contribution of the paper is to demonstrate how the monetary transmission mechanism is altered by these endogenous agency costs. In particular, do agency costs amplify and/or propagate monetary shocks?
PDF file 131K
This paper demonstrates that in a plausibly calibrated monetary model with explicit production, exogenous money growth rules ensure real determinacy and thus avoid sunspot fluctuations. Although it is theoretically possible to construct examples in which real indeterminacy does arise, these examples rely on implausible money demand elasticities or ignore the effect of production on the models dynamics.
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This paper analyzes the restrictions necessary to ensure that the policy rule used by the central bank does not introduce real indeterminacy into the economy. It conducts this analysis in a flexible price economy and a sticky price model. A robust conclusion is that to ensure determinacy the monetary authority should follow a backward-looking rule where the nominal interest rate responds aggressively to past inflation rates.
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In this paper we analyze recent trends in aggregate property crime rates in the United States. We propose a dynamic equilibrium model which guides our quantitative investigation of the major determinants of observed patterns of crime. Our main findings can be summarized as follows.
First, the model is capable of reproducing the drop in crime between 1980 and 1996. Second, the most important factors that account for the observed decline in property crime are the higher apprehension probability, the stronger economy, and the aging of the population. Third, the effect of unemployment on crime is negligible. Fourth, increased earnings inequality prevented an even larger decline in crime. Overall, our analysis can account for the behavior of the time series of property crime rates over the past quarter century.
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An innovation in this paper is to introduce a time-to-build technology for the production of market capital into a model with home production. Our main finding is that the two anomalies that have plagued all household production modelsthe positive correlation between business and household investment, and household investment leading business investment over the business cycleare resolved when time-to-build is added..
PDF file 161K
Working Paper 0006 top
Protectionist Demands in Globalization
by by Arzu Ilhan and Özgür Kibris
We analyze a small open economy. The citizens have single-peaked preferences on the tariff rate for an import good. They declare a publicly most preferred tariff rate to the government which has discretion in the choice of the implemented tariff rate. While the government has incentive not to deviate too much from the publicly chosen tariff rate, its final choice is determined by bargaining with a foreign lobby who has a much lower optimal tariff rate and offers monetary transfers to the government in return for lowered tariffs. We show that the expectation of such a foreign influence affects the citizens voting behavior. Namely, they tend to vote for a more protectionist tariff policy. Moreover, this behavior leads to an increase in transfers by the foreign lobby.
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We present new results on existence, the number of equilibria, and welfare for search-theoretic models of money that extend the literature in several ways. For example, we provide results for general bargaining parameters while previous papers consider only special cases. Also, we present two version of the model: in one agents holding money cannot produce, in the other they can. The former model has been used in essentially all the previous literature, although the latter seems more natural for some purposes, and avoids several undesirable implications. Since very little is known about this version, we analyze it in detail.
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Working Paper 0004 top
The Expectations Trap Hypothesis
by Lawrence J. Christiano and Christopher Gust
We explore a hypothesis about the take-off in inflation that occurred in the early 1970s. According to the expectations trap hypothesis, the Fed was pushed into producing the high inflation out of a fear of violating the public's inflation expectations. We compare this hypothesis with the Phillips curve hypothesis, according to which the Fed produced the high inflation as an unfortunate by-product of a conscious decision to jump-start a weak economy. Which hypothesis is more plausible has important implications for what needs to be done to prevent other inflation flare-ups.
PDF file 440K
Working Paper 0003R top
Anatomy of a Fair-Lending Exam: The Uses and Limitations of Statistics
by Paul S. Calem and Stanley D. Longhofer
Revised: In this paper, we consider the role of statistical analysis in fair-lending compliance examinations. We present a case study of an actual fair-lending examination of a large mortgage lender, demonstrating how statistical techniques can be a valuable tool in focusing examiner efforts to either uncover illegal discrimination or exonerate an institution so accused. Importantly, our case also highlights the limitations of such statistical techniques. The study suggests that statistical analysis combined with comparative file review offer a balanced and thorough approach to enforcement of fair-lending laws.
PDF file 155K
Working Paper 0002 top
How Much Should Americans Be Saving for Retirement?
by B. Douglas Bernheim, Lorenzo Forni, Jagadeesh Gokhale, and Laurence J. Kotlikoff
How much should Americans save prior to retirement? Given Social Security's shaky financial condition, this is a critical question for baby boomers. A financial planning program ESPlanner is applied to data from the Health and Retirement Survey (HRS) to consider the amount that households approaching retirement should save. ESPlanner calculates households' highest sustainable living standards under borrowing constraints, simultaneously determining the saving and life insurance required to preserve those living standards through time.2 Two alternative assumptions are made first, Social Security's promised benefits are fully paid and, second, benefits are permanently cut by 30 percent after 15 years. We find that ESPlanner's recommended saving rates are quite high for all except the poorest households. Moreover, if these households are assuming that Social Security benefits will be fully paid, their saving will turn out to be much too low if major benefit-cuts occur after the baby boomers retire.
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Working Paper 0001 top
Designing Stabilization Policy in a Monetary Union
by Russell Cooper and Hubert Kempf
While the European Monetary Union (EMU) is now a reality, debate among economists nonetheless continues about the design and desirability of monetary unions. Since an essential element of a monetary union is the delegation of monetary power to a single centralized entity, one of the key issues in this debate is whether a monetary union will limit the effectiveness of stabilization policy. If so, monetary union will not necessarily be welfare improving. In this paper, we study a two-country world economy and consider various designs of monetary union. We argue that the success of monetary union depends on: (i) the commitment ability of the single central bank, (ii) the policy flexibility of the national fiscal authorities and the central monetary authority and (iii) the cross country correlation of shocks. If, for example, the central bank moves before the fiscal authorities, then a monetary union will increase welfare as long as fiscal policy is sufficiently responsive to shocks. However, if the fiscal authorities have a restricted set of tools and/or the monetary authority lacks the ability to commit to its policy, then monetary union may not be desirable.
PDF file 396K
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